On July 15, the IRS released proposed regulations that simplify the procedures for taxpayers claiming the reduced research credit under Sec. 280C(c)(3) (REG-130200-08).
Taxpayers who claim a credit under Sec. 41 for increasing research expenditures must reduce their research expenditures deduction under Sec. 174 by the amount of the Sec. 41 credit. Similarly, taxpayers who elect to capitalize research expenses must reduce the amount chargeable to the capital account for such expenses by the amount that the Sec. 41 research credit exceeds the amount allowable as a deduction for research expenses.
Taxpayers can avoid reducing the deduction for research expenses or the amount charged to a capital account by making an election under Sec. 280C(c) (3) to take a reduced research credit. The amount of the reduction equals the excess of the amount of the Sec. 41 credit over the credit amount multiplied by the maximum corporate tax rate.
Under the current regulations, taxpayers make the election to claim a reduced credit on their original tax return; once made, the election is irrevocable for that tax year. The proposed regulations would allow taxpayers to make the election on Form 6765, Credit for Increasing Research Activities.
The proposed regulations also address the question of whether members of a controlled group can make separate elections. Under the proposed regulations, each member of a controlled group would be able to make the election after the group Sec. 41 credit had been calculated and allocated under the rules of Regs. Sec. 1.41-6 and Temp. Regs. Sec. 1.41-6T.
The rules in the proposed regulations will be effective upon finalization.